The November labor report, Fed announcement, and most of the quarterly earnings are now behind us.

Ironically, now that traders aren’t waiting for anticipated information, volatility tends to increase. In fact, the CBOE’s risk indicator (SKEW) is back up near its highs as traders hedge against a drawdown despite a bullish trend.

However, there are a few things that may help prevent any profit taking after a big week.

The Fed chair Jerome Powell will be speaking in conferences today and tomorrow. While these are usually benign, pre-written speeches, sometimes the Fed sneaks in a few hints about monetary policy if they think the market needs it.

In this case, we think Powell will reaffirm their commitment to maintaining growth over inflation risks in the short-term. That means investors should continue to focus on growth sectors like Technology and Consumer Discretionary for maximum upside in November.

Here are some other insights for the week ahead…

Inflation

Comments from Powell could come at just the right time this week. The Producer Price Index (PPI) will be released on Tuesday before the market opens and if it continues to ease off like it has the past two months, traders could be very motivated to increase their tech positions.

Announcing: The New “Inflation Trade”

We like the following stocks…

• Microsoft Corp. (NASDAQ:MSFT): Huge earnings and a very defensible position in cloud computing, and collaborative work software.
• QUALCOMM Inc. (NASDAQ:QCOM): Semiconductors are risky, but earnings were a blowout and chip demand isn’t slacking off anytime soon.
• Adobe Inc. (NASDAQ:ADBE): Just peeking above resistance the stock should be a big winner on increased business spending.

The average PPI reading has been 6% inflation on an annualized basis. The numbers have been easing off a little, which is good, but energy prices could spoil it and put traders back on edge.

Although it is a little less predictive, the Consumer Price Index (CPI) is also due this week on Wednesday. If consumer prices are rising (inflation), then products and services are getting more expensive. If everything else remains equal, rising prices means demand will fall. Most of GDP is consumer spending, so this would be a bad thing.

However, if prices are rising at the same or lower rate as wages, they should net out with each other. Right now, we don’t think rising prices are going to curtail the consumer spending juggernaut because wages and job growth has been high, but it’s a metric we will continue watching for any surprises.

Earnings

Always trying to be a maverick, Berkshire Hathaway Inc. (NYSE:BRK-A, NYSE:BRK-B) reported earnings last Saturday morning. The news was less than enthralling for Berkshire, and after looking at the insurance numbers, we think that is a sector to continue avoiding this year and next.

Would you prefer a 159% gain… or a 4,157% windfall?  

Buffett’s company reported earnings increased to $4,302 for class-A shareholders. In our view, it’s unfortunate that those investors can’t have access to any of that money through dividends.

That increase amounts to about 25% compared to last year, which is good, but it looks like the Oracle from Omaha will continue to lag the market.

• According to FactSet, 89% of the S&P 500 have reported with analysts expecting 40% year-over-year growth for the end of 2021. 81% of the companies that have reported beat expectations. That’s good, but a high beat ratio isn’t especially meaningful this year as analysts continue to adjust to the disruptions since COVID.
• The biggest gains in revenue and earnings have been in the energy sector, which is great for oil investors but its also a risk we need to put on our radar. Higher gas prices have a big impact on consumer spending. Having that happen in the all-important fourth quarter is really bad timing.
• Big reports that we think will provide some insight into the market:
  • AMC Entertainment Holdings Inc. (NYSE:AMC) today: If you like meme stocks or just enjoy the spectacle, this one should be fun to watch.
  • Coinbase Global Inc. (NASDAQ:COIN) and DoorDash Inc. (NYSE:DASH) Tuesday: Low-value but high-potential stocks are reporting on Tuesday. We think the reaction to these speculative stocks will tell us a lot about risk appetite and investor sentiment.
  • The Walt Disney Co. (NYSE:DIS) Wednesday: Hopefully, CEO Robert A. Chapek, can revive some confidence in DIS’s streaming platforms after tanking the stock in September.

Weird Stuff

Besides the meme stock reports, we are expecting to cause a stir in the market this week, it will be interesting to follow Tesla Inc. (NASDAQ:TSLA).

The easily bored Elon Musk asked Twitter whether he should sell 10% of his TSLA shares to fund a mission to mars and promised to abide by the results.

The collective nitwits and morons on social media responded and Elon “must” sell to keep his word. The tricky part here is how seriously investors will take this and whether this could be construed as market manipulation — which isn’t unheard of for Elon.

A Radical New Way to Make $1,375 or More Upfront

If Elon were to sell, he has a theoretically fiduciary duty not to do so in a way that would harm his other shareholders, so this will be an interesting tightrope…

The Takeaways

Because the Fed has set trader expectations towards lower inflation, we like tech and retail stocks. Specifically, we think these are some potential big winners…

• Microsoft Corp.: Huge earnings and a very defensible position in cloud computing, and collaborative work software.
• QUALCOMM Inc.: Semiconductors are risky, but earnings were a blowout and chip demand isn’t slacking off anytime soon.
• Adobe Inc.: Just peeking above resistance the stock should be a big winner on increased business spending.

For investors with a very high risk tolerance, Tesla’s volatility could be interesting.

It seems very unlikely that Musk will wind up honoring his “agreement” with Twitter, and anything he says to soothe the market (and appease some disgruntled shareholders) will probably benefit the stock and send it back up to its prior highs.

We’ll be back with you on Friday.

Sincerely,

John and Wade

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